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It also shows how great crisis always start, the problems with low wages and global competition for some type of work is not there.. this is a problem after the lack of demand is resolved... Although it is true that higher income differences make a large scare more likely.

What seems to happen is that the financial sector, if unconstrained, will always try to juice the economy with debt. Steve keen has shown that employment is strongly related to the change in debt. See Deleveraging, Deceleration and the Double Dip Debt allows future purchasing power to be brought into the present and this increases growth -- until a society is drowning in debt. When TPTB are driving down consumption by driving down wages so as to keep a larger piece of the pie for themselves, they seem naturally to turn to debt bubbles for relief from the contraction that naturally occurs.

Debt adds to growth in the early stages of a bubble. But when the bubble bursts and the debt has to be repaid debt repayment subtracts from growth as people defer or forgo consumption to pay down debt. The role of debt is like the third rail for "mainstream economics". They try to deny its relevance, because, if its role is understood it undercuts their arguments and exposes their manipulations.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 20th, 2011 at 10:10:47 PM EST
[ Parent ]
The problem is that paying down debt does not increase the spending of the receiver of debt.. the money just evaporates for consumption and is almost automatically saved..

great comments

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Sat May 21st, 2011 at 05:17:36 AM EST
[ Parent ]
the money just evaporates for consumption

Right! A small fraction of debt repayment might show up as spending from financial sector executives' bonuses, but most, even of this money, is deployed back into more financial ponzi schemes. If it went back into investment for social overhead capital or domestic production capital it would help, but, with current financial realities, it is more likely to go the investments in the BRICs, where it generates better returns for the owners of the capital. Your (formerly) 1st world domestic economy only serves as a target for wealth extraction, not a site for wealth creation. This is true in Spain as well as in the USA.

Workers of the world, ....

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 21st, 2011 at 09:30:08 AM EST
[ Parent ]
I absolutely agree... It cna also be used to ver the asses, and cover the capital needed for banks not to blow up...

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon May 23rd, 2011 at 07:46:48 AM EST
[ Parent ]
And if the lender has an underwater balance sheet, the money that is repaid will go to pay for spending that is long in the past -- unless there is a default.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 21st, 2011 at 02:52:35 PM EST
[ Parent ]
...debt repayment subtracts from growth as people defer or forgo consumption to pay down debt.

Obviously this is true, but hardly the reason for the recession now or housing market crash. The debt first creates debt deflation to real economy, and only after that, problems start. All happens before deleveraging. I'm quite sure that USA, Ireland or Spain were not deleveraging when problems started. The Serious People talked about "liquidity" (whatever that in the end means(most likely a recession of the real economy)).

by kjr63 on Sun May 22nd, 2011 at 05:15:30 PM EST
[ Parent ]
A financial crisis leads to banks stop lending which is very bad news as all sorts of investments hinges on bank loans. The longer it lasts, the worse the consequences.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon May 23rd, 2011 at 05:00:44 AM EST
[ Parent ]

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